Crafting a perpetuation plan for your agency
By Carey Wallace
As an independent insurance agency owner, planning for the future of your agency’s ongoing operation is a responsibility that is critically important to your family, staff, and customers. Sadly, it is also one of the planning areas that is most likely to be put off or avoided.
It is difficult for many to contemplate a day when they will no longer be part of the organization that they have built. The reality is over 70% of independent insurance agencies are owned by baby boomers, and by the year 2029, all baby boomers will be at or beyond retirement age.
The fastest way for an agency to sell at a discount is to have a single owner at or beyond the age of retirement with no plan. If you have an idea for the future of your agency, and it is not written down, it is not a plan. Not having a well-documented plan can create both confusion and uncertainty at a time when the people who depend on you most need clear guidance.
The fastest way for an agency to sell at a discount is to have a
single owner at or beyond the age of retirement with no plan.
The significance of perpetuation planning
A perpetuation plan is a roadmap that safeguards the continuity and success of your agency beyond your active involvement. It not only addresses the financial aspects but also considers the well-being of your family, the livelihood of your staff, and the satisfaction of your clients.
Failure to establish a perpetuation plan may result in uncertainty, potential financial instability, and a disruption of services for clients. The uncertainty created by having no documented perpetuation plan creates delays in the decision-making process which can cause your staff and clients to become nervous and leave. This can also cause your referral partner and carriers to look for alternative options as well and possibly change their relationship with the agency.
All of these reactions, which are caused by the sudden loss of an owner, can be avoided by having a solid plan that can be communicated and executed quickly.
Where do I start?
To create a perpetuation plan, you must lay out a comprehensive strategy that outlines the transition of your agency’s ownership and management in the event of your death, disability, or retirement. The terms and mechanisms involved with each of these triggering events will need to be well documented and tested ensuring that the ongoing operation of the agency is possible under each scenario. In addition, the valuation methodology, key staff or individuals, experts, as well as the overall process need to be outlined as a clear guide that can be well executed, protecting the future of the agency.
Maintaining a current list of all systems used, corporate accounts, passwords, insurance policies, business contacts, and partners will save time and provide your successors with the information that they need to effectively implement the plan that you have outlined.
Setting the terms
When documenting your perpetuation plan, it is crucial to establish clear terms that dictate the course of action that applies for each triggering event such as death, disability, or retirement. These terms should be outlined in a legal document and include details regarding the transfer of ownership, distribution of assets, and the continuation of business operations.
In the unfortunate event of your death, the perpetuation plan should clearly define how ownership will be transferred and list all the available funding sources. This may involve the sale of your agency to a key employee, a family member, or an external party. In the case of disability, provisions should be made for a seamless transition of managerial responsibilities to a designated individual or team as well as the sale of the agency.
The timing, funding source, and mechanism utilized for the transition of ownership in this situation may vary greatly to ensure the ongoing operation of the agency. Similarly, retirement terms should include a phased approach to transferring ownership and management control while maintaining stability for clients and staff.
Valuing the agency
Determining the value of your independent insurance agency is a critical step in the perpetuation planning process. Accurate valuation ensures a fair and equitable distribution of assets, facilitates the smooth transition of ownership, and provides financial security for all parties involved.
Many agency owners refer to the value of their agency as a multiple of revenue. This rule of thumb is dangerous, as it does not contemplate the many factors that contribute to the value of an agency and can grossly undervalue or overvalue an agency based on its performance, concentration, transferability, and unique situation.
The most common valuation methodology utilized for independent insurance agencies is the fair market valuation based on a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).
Engaging experts
Planning for the future of your agency is a complex process that often requires the expertise of professionals such as valuation, tax, and legal advisors. These professionals play a crucial role in assessing the true worth of your agency, considering factors such as client retention, revenue streams, and market conditions.
By involving experts, you can ensure a comprehensive and unbiased valuation that benefits both your family and the incoming owners. Utilizing these individuals or firms to evaluate the tax implications for transition methods being considered is incredibly important to all parties involved. In addition, making sure that you engage a legal professional who is familiar with both the industry and the types of ownership transactions being considered is essential to crafting the plan and documents that best fit your situation.
Engaging the help of professionals who are not familiar with the independent insurance agency operations and nuances can lead to poor advice, so be sure to engage with professionals who have a solid understanding of your business and experience with these types of transactions.
Identifying key individuals
A successful perpetuation plan relies on the identification and involvement of key individuals who will play pivotal roles in the transition process. These individuals may include family members, key employees, and external advisors. Clearly defining the responsibilities of each party ensures a smooth and organized transition.
In the case of death, family members or a trusted colleague may take on ownership roles or participate in decision-making processes to maintain the operation of the agency until it can be sold externally or transitioned internally. Key employees who have demonstrated leadership and a deep understanding of the business can be groomed to assume managerial responsibilities.
External advisors, including legal, valuation and financial professionals, contribute valuable insights to ensure a legally sound and financially viable perpetuation plan is executed properly.
The mechanism and process for transition
The perpetuation plan should outline the mechanisms for a seamless transition of ownership and management. This will include provisions for both the sudden unexpected transfer of ownership and managerial duties as well as the gradual transfer of responsibilities, client communication strategies, and training programs for incoming leaders. The goal is to minimize disruption to daily operations and maintain a high level of service for clients during the transition period.
Many agency owners refer to the value of their agency as a multiple of revenue. This rule of thumb is dangerous, as it does not contemplate the many factors that contribute to the value of an agency…
In the event of death, a well-defined mechanism ensures that there is a designated individual or team ready to assume control immediately. For disability, a contingency plan should be in place to address the sudden absence of key decision-makers. In the case of retirement, a phased transition plan allows for a gradual handover of responsibilities, ensuring that the incoming leadership is well-prepared.
Documenting a perpetuation plan for your agency and reviewing it annually is one of the most valuable things you can do for the people in your life. By setting clear terms, engaging experts for valuation, tax, and legal advice, identifying key individuals, establishing transition mechanisms, following a systematic process, and maintaining a list of key information you can ensure the longevity and success of your agency beyond your active involvement.
A carefully crafted perpetuation plan not only secures the financial well-being of your family, but also provides stability for your staff and a seamless experience for your clients and ensures that the agency you’ve built will continue into perpetuity.
The author
Over the past 16 years, Carey Wallace has worked with hundreds of independent insurance agencies helping them understand their agency’s value and turn that knowledge into an actionable plan for their future. She prides herself on taking the time to understand the agency’s unique situation and helping them build the future they envision for themselves. She is a Certified Exit Planning Advisor (CEPA) and provides a variety of business consulting services including valuation, perpetuation planning services, acquisition support, financial and compensation analysis, and fractional CFO services through the company she founded, Agency Focus, LLC. To learn more, please visit www.agency-focus.com or contact Carey at Carey@agency-focus.com.
